Obama's Greatest Betrayal
The Coming Sell-Out to the Super Rich and What It Means for the Rest of Us
By Michael Hudson:
Michael Hudson is a former Wall Street economist
CounterPunch: November 15, 2010
Now that President Obama is almost celebrating his bipartisan willingness to
renew the tax cuts for the super-rich enacted under George Bush ten years
ago, it is time for Democrats to ask themselves how strongly they are
willing to oppose an administration that looks like Bush-Cheney III. Is this
what they expected by Obama's promise to rise above partisan politics - by
ruling on behalf of Wall Street, now that it is the major campaign backer of
both parties?
It is a reflection of how one-sided today's class war has become that Warren
Buffet has quipped that "his" side is winning without a real fight being
waged. No gauntlet has been thrown down over the trial balloon that the
president and his advisor David Axelrod have sent up over the past two weeks
to extend the Bush tax cuts for the wealthiest 2 per cent for "just" two
more years. For all practical purposes the euphemism "two years" means
forever - at least, long enough to let the super-rich siphon off enough more
money to bankroll enough more Republicans to be elected to make the tax cuts
permanent.
Obama seems to be campaigning for his own defeat! Thanks largely to the $13
trillion Wall Street bailout - while keeping the debt overhead in place for
America's "bottom 98 per cent" - this happy 2 per cent of the population now
receives an estimated three quarters (~75 per cent) of the returns to wealth
(interest, dividends, rent and capital gains). This is nearly double what it
received a generation ago. The rest of the population is being squeezed, and
foreclosures are rising.
Baudelaire quipped that the devil wins at the point where he manages
convince the world that he doesn't exist. Today's financial elites will win
the class war at the point where voters believe it doesn't exist - and
believe that Obama is trying to help them rather than shepherd them into
debt peonage as the economy settles into debt deflation.
We are dealing with shameless demagogy. The financial End Time has arrived,
but Obama's happy-talk pretends that "two years" will get us through the
current debt-induced depression. The Republican plan is to make more
Congressional and Senate gains in 2012 as Obama's former supporters "vote
with their backsides" and stay home, as they did earlier this month. So "two
years" means forever in politician-talk. Why vote for a politician who
promises "change" but is merely an exclamation mark for the Bush-Cheney
policies from Afghanistan and Iraq to Wall Street's Democratic Leadership
Council on the party's right wing? One of its leaders, after all, was
Obama's Senate mentor, Joe Lieberman.
The second pretense is that cutting taxes for the super-rich is necessary to
win Republican support for including the middle class in the tax cuts. It is
as if the Democrats never won a plurality in Congress. (One remembers George
W. Bush with his mere 50+ per cent, pushing forward his extremist policies
on the logic that: "I've got capital, and I'm using it." What he had, of
course, was Democratic Leadership Committee support.) It's all "to create
jobs," headed by employment of shipyard workers building yachts for the
nouveau riches and foreclosing on the ten million Americans whose mortgage
payments have fallen into arrears. It sounds Keynesian - or at least,
reminiscent of Thomas Robert Malthus's claim (as lobbyist for Britain's
landed aristocracy) that landlords would use their rent income to hire
footmen, carriage-makers and butlers to keep the economy going.
It gets worse. Obama's "Bush" tax cut is only Part I of a one-two punch to
shift taxes onto wage earners. Congressional economists estimate that
extending the tax cuts to the top 2 per cent will cost $700 to $750 billion
over the next decade or so. "How are we going to go out and borrow $700
billion?" Obama asked Steve Kroft in his Sixty Minutes interview on CBS
last week.
It was a rhetorical question. The President has appointed a bipartisan
commission (right-wingers on both sides of the aisle) to "cure" the federal
budget deficit by cutting back social spending - to pay yet more bailouts to
the economy's financial wreckers. The National Commission on Fiscal
Responsibility and Reform might better be called the New Class War
Commission to Scale Back Social Security and Medicare Payments to Labor in
Order to Leave more Tax Revenue Available to Give Away to the Super-Rich. A
longer title than the Deficit-Reduction Commission used by media friendlies,
but sometimes it takes more words to get to the heart of matters.
The political axiom at work is "Big fish eat little fish." There's not
enough tax money to continue swelling the fortunes of the super-rich
pretending to save enough to pay the pensions and related social support
that North American and European employees have been promised. Something
must give - and the rich have shown themselves sufficiently foresighted to
seize the initiative. For a preview of what's in line for the United States,
watch neoliberal Europe's fight against the middle and working class in
Greece, Ireland and Latvia; or better yet, Pinochet's Chile, whose
privatized Social Security accounts were quickly wiped out in the late 1970s
by the kleptocracy advised by the Chicago Boys, to whose monetarist
double-think Obama's appointee Ben Bernanke has just re-pledged his
loyalty.
What is needed to put Obama's sell-out in perspective is the pro-Wall
Street advisors he has chosen - not only Larry Summers, Tim Geithner and Ben
Bernanke, but by stacking his Deficit Reduction Commission with outspoken
advocates of cutting back Social Security, Medicare and other social
spending. Their ploy is to frighten the public with a nightmare of $1
trillion deficit to pay retirement income over the next half century - as if
the Treasury and Fed have not just given Wall Street $13 trillion in
bailouts without blinking an eye. President Obama's $750 billion tax
giveaway to the wealthiest 2 per cent is mere icing on the cake that the
rich will be eating when the bread lines get too long.
To put matters in perspective, bear in mind that interest on the public debt
(that Reagan-Bush quadrupled and Bush-Obama redoubled) soon will amount to
$1 trillion annually. This is tribute levied on labor - increasing the
economy's cost of living and doing business - paid for losing the fight for
economic reform and replacing progressive taxation with regressive
neoliberal tax policy. As for military spending in the Near East, Asia and
other regions responsible for much of the U.S. balance-of-payments deficit,
Congress will always rise to the occasion and defer to whatever foreign
threat is conjured up requiring new armed force.
It's all junk economics. Running a budget deficit is how modern governments
inject the credit and purchasing power needed by economies to grow. When
governments run surpluses, as they did under Bill Clinton (1993-2000),
credit must be created by banks. And the problem with bank credit is that
most is lent, at interest, against collateral already in place. The effect
is to inflate real estate and stock market prices. This creates capital
gains - which the "original" 1913 U.S. income tax treated as normal income,
but which today are taxed at only 15 per cent (when they are collected at
all, which is rarely in the case of commercial real estate). So today's tax
system subsidizes the inflation of debt-leveraged financial and real estate
bubbles.
The giveaway: the Commission's position on tax deductibility for mortgage
interest
The Obama "Regressive Tax" commission spills the beans with its proposal to
remove the tax subsidy for high housing prices financed by mortgage debt.
The proposal moves only against homeowners - "the middle class" - not
absentee owners, commercial real estate investors, corporate raiders or
other prime bank customers.
The IRS permits mortgage interest to be tax-deductible on the pretense that
it is a necessary cost of doing business. In reality it is a subsidy for
debt leveraging. This tax bias for debt rather than equity investment (using
one's own money) is largely responsible for loading down the U.S. economy
with debt. It encourages corporate raiding with junk bonds, thereby adding
interest to the cost of doing business. This subsidy for debt leveraging
also is the government's largest giveaway to the banks, while causing the
debt deflation that is locking the economy into depression - violating every
precept of the classical drive for "free markets" in the 19th-century. (A
"free market" meant freedom from extractive rentier income, leading toward
what Keynes gently called "euthanasia of the rentier." The Obama Commission
endows rentiers atop the economy with a tax system to bolster their power,
not check it - while shrinking the economy below them.)
Table 7.11 of the National Income and Product Accounts (NIPA) reports that
total monetary interest paid in the U.S. economy amounted to $3,240 billion
in 2009. Homeowners paid just under a sixth of this amount ($572 billion) on
the homes they occupied. Obama's commission estimates that removing the tax
credit on this interest would yield the Treasury $131 billion in 2012.
There is in fact a good logic for stopping this tax credit. The
mortgage-interest tax deduction does not really save homeowners money. It is
a shortsighted illusion. What the government gives to "the homeowner" on one
hand is passed on to the mortgage banker by "the market" process that leads
bidders for property to pledge the net available rental value to the banks
in order to obtain a loan to buy the home (or an office building, or an
entire industrial company, for that matter.) "Equilibrium" is achieved at
the point where whatever rental value the tax collector relinquishes becomes
available to be capitalized into bank loans.
This means that what appears at first as "helping homeowner" afford to pay
mortgages turns out merely to enable them to afford to pay more interest to
their bankers. The tax giveaway uses homebuyers as "throughputs" to transfer
tax favoritism to the banks.
It gets worse. By removing the traditional tax on real estate, state, local
and federal governments need to tax labor and industry more, by transforming
the property tax onto income and sales taxes. For banks, this is transmuting
tax revenue into gold - into interest. And as for the home-owning middle
class, it now has to pay the former property tax to the banker as interest,
and also to pay the new taxes on income and sales that are levied to make up
for the tax shift.
I support removing the tax favoritism for debt leveraging. The problem with
the Deficit Commission is that it does not extend this reform to the rest of
the economy - to the commercial real estate sector, and to the corporate
sector.
The argument is made that "The rich create jobs." After all, somebody has to
build the yachts. What is missing is the more general principle: Wealth and
income inequality destroy job creation. This is because beyond the wealthy
soon reach a limit on how much they can consume. They spend their money
buying financial securities - mainly bonds, which end up indebting the
economy. And the debt overhead is what is pushing today's economy into
deepening depression.
Since the 1980s, corporate raiders have borrowed high-interest "junk bond"
credit to take over companies and make money by stripping assets, cutting
back long-term investment, research and development, and paying out
depreciation credit to their financiers. Financially parasitized companies
use corporate income to buy back their stock to support its price - and
hence, the value of stock options that financial managers give themselves -
and borrow yet more money for stock buybacks or simply to pay out as
dividends. When the process has run its course, they threaten their work
force with bankruptcy that will wipe out its pension benefits if employees
do not agree to "downsize" their claims and replace defined-benefit plans
with defined-contribution plans (in which all that employees know is how
much they pay in each month, not what they will get in the end). By the time
this point has been reached, the financial managers have paid themselves
outsized salaries and bonuses, and cashed in their stock options - all
subsidized by the government's favorable tax treatment of debt leveraging.
The attempted raids on McDonalds and other companies in recent years provide
object lessons in this destructive financial policy of "shareholder
activists." Yet Obama's Deficit Reduction Commission is restricting its
removal of tax favoritism for debt leveraging only for middle class
homeowners, not for the financial sector across the board. What makes this
particularly absurd is that two thirds of homeowners do not even itemize
their deductions. The fiscal loss resulting from tax deductibility of
interest stems mainly from commercial investors.
If the argument is correct (and I think it is) that permitting interest to
be tax deductible merely "frees" more revenue to pay interest to banks - to
capitalize into yet higher loans - then why isn't this principle even more
applicable to the Donald Trumps and other absentee owners who seek always to
use "other peoples' money" rather than their own? In practice, the "money"
turns out to be bank credit whose cost to the banks is now under 1 per cent.
The financial-fiscal system is siphoning off rental value from commercial
real estate investment, increasing the price of rental properties,
commercial real estate, and indeed, industry and agriculture.
Alas, the Obama administration has backed the Geithner-Bernanke policy that
"the economy" cannot recover without saving the debt overhead. The reality
is that it is the debt overhead that is destroying the economy. So we are
dealing with the irreconcilable fact that the Obama position threatens to
lower living standards from 10 per cent to 20 per cent over the coming few
years - making the United States look more like Greece, Ireland and Latvia
than what was promised in the last presidential election.
Something has to give politically if the economy is to change course. More
to the point, what has to give is favoritism for Wall Street at the expense
of the economy at large. What has made the U.S. economy uncompetitive is
primarily the degree to which debt service has been built into the cost of
living and doing business. Post-classical "junk economics" treats interest
and fees as payment for the "service" for providing credit. But interest
(like economic rent and monopoly price extraction) is a transfer payment to
bankers with the privilege of credit creation. The beneficiaries of
providing tax favoritism for debt are the super-rich at the top of the
economic pyramid - the 2 per cent whom Obama's tax giveaway will benefit by
over $700 billion.
If the present direction of tax "reform" is not reversed, Obama will shed
crocodile tears for the middle class as he sponsors the Deficit Reduction
Commission's program of cutting back Social Security and revenue sharing to
save states and cities from defaulting on their pensions. One third of U.S.
real estate already is reported to have sunk into negative equity, squeezing
state and local tax collection, forcing a choice to be made between
bankruptcy, debt default, or shifting the losses onto the shoulders of
labor, off those of the wealthy creditor layer of the economy responsible
for loading it down with debt.
Critics of the Obama-Bush agenda recall how America's Gilded Age of the late
19th century was an era of economic polarization and class war. At that time
the Democratic leader William Jennings Bryan accused Wall Street and Eastern
creditors of crucifying the American economy on a cross of gold. Restoration
of gold at its pre-Civil War price led to a financial war in the form of
debt deflation as falling prices and incomes received by farmers and wage
labor made the burden of paying their mortgage debts heavier. The Income Tax
law of 1913 sought to rectify this by only falling on the wealthiest 1 per
cent of the population - the only ones obliged to file tax returns. Capital
gains were taxed at normal rates. Most of the tax burden therefore felon
finance, insurance and real estate (FIRE) sector
The vested interests have spent a century fighting back. They now see
victory within reach, by perpetuating the Bush tax cuts for the wealthiest 2
per cent, phasing out of the estate tax on wealth, the tax shift off
property onto labor income and consumer sales, and slashing public spending
on anything except more bailouts and subsidies for the emerging financial
oligarchy that has become Obama's "bipartisan" constituency.
What we need is a Futures Commission to forecast just what will the rich do
with the victory they have won. As administered by President Obama and his
designated appointees Tim Geithner and Ben Bernanke, their policy is
financially and fiscally unsustainable. Providing tax incentives for debt
leveraging - for most of the population to go into debt to the rich, whose
taxes are all but abolished - is shrinking the economy. This will lead to
even deeper financial crises, employer defaults and fiscal insolvency at the
state, local and federal levels. Future presidents will call for new
bailouts, using a strategy much like going to military war. A financial war
requires an emergency to rush through Congress, as occurred in 2008-09.
Obama's appointees are turning the U.S. economy into a Permanent Emergency,
a Perpetual Ponzi Scheme requiring injections of more and more Quantitative
Easing to to rescue "the economy" (Obama's euphemism for creditors at the
top of the economic pyramid) from being pushed into insolvency. Bernanke's
helicopter flies only over Wall Street. It does not drop monetary relief on
the population at large.
Michael Hudson is a former Wall Street economist. A Distinguished Research
Professor at University of Missouri, Kansas City (UMKC), he is the author of
many books, including Super Imperialism: The Economic Strategy of American
Empire (new ed., Pluto Press, 2002) and Trade, Development and Foreign Debt:
A History of Theories of Polarization v. Convergence in the World Economy.
He can be reached via his website, mh@michael-hudson.com
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